Why SAP and Oracle’s So-Called “Hybrid” Approach to SaaS Won’t Work

March 29, 2007 Appirio

Lately some of the major on-premise software companies – notably SAP and Oracle – have been making statements to convince the market that they are more actively embracing software-as-a-service, or SaaS. SAP executives, who once dismissed on-demand software as a fad, and then tried to introduce ambiguity by using terms such as isolated tenancy, now say that SaaS has its place in the enterprise software landscape. Alongside its $22 billion investment in acquiring on-premise software companies, Oracle has placed a moderate bet on SaaS – just as they have with open-source and seemingly every other emerging trend.

If only words could make it so. SAP and Oracle rely on billions of dollars in on-premise software maintenance revenue to drive their businesses. They acknowledge they are not shifting their software strategies to SaaS, but instead merely adding it as an option. Their new marketing says customers want choice; the hybrid model is best for everyone; and an integrated suite will always provide an advantage.

Let’s examine each of these myths.

Myth: Customers Want Choice….and the Hybrid Model Gives It To Them
Politicians have a great trick for making a debatable proposition sound like a slam-dunk. They will take a bill with controversial provisions and name it the “Freedom Act” or “Prosperity and Happiness Bill,” using words no one could take issue with.

Legacy on-premise vendors promote “choice” in a similar vein. After all, who could argue with “choice” as a virtue? Well, while customers certainly want options, that notion has little to do with a particular vendor suggesting they provide a magic solution that fits all scenarios. For example, the market allows customers to choose between using a local power generator (on-premise) and buying electricity as a utility (on-demand). There are circumstances that favor each scenario, and the market provides customers a distinct choice.

What customers do not want is a vendor stating that the less cost-effective solution of on-premise resources can be extended to provide on-demand capabilities without any drawbacks. Moreover, by claiming that “choice” comes from using the vendor’s solution, they actually highlight the lack of flexibility in their own offering. Once installed, on-premise software systems make it difficult to move information to an alternative solution without very high switching costs. With SaaS solutions, the customer makes a repeated choice to use the solution every month. The only “choice” on-premise vendors offer with hybrid solutions is a once in a lifetime (or career) decision.

Myth: The Integrated Suite Is Always the Better Solution
Another argument often used by Oracle and SAP is that an integrated suite provides superior value for the customer. In the past, for business application software this has been partially true. Their tightly integrated proprietary applications forced customer lock-in and made it difficult to use complementary and superior independent solutions. By insisting that a single suite benefits the customer, the vendors once again highlight the inflexibility of their own architectures. If SAP and Oracle sold PCs, they would suggest that a single vendor should provide the computer, display, power adapter, keyboard, and all peripherals– never acknowledging that this approach makes it impossible to effectively use the innovative solutions of others.

The web represents the culmination of loosely coupled components working together to create cohesive solutions across people and domains. Few websites would attempt to rebuild a mapping solution; they would create a mashup with Google or Yahoo. In the SaaS future, multi-tenant solutions will create well defined interfaces that offer consistency for adjacent solutions. Even today, Salesforce.com still supports backwards compatibility for all nine releases of their web services interface. With this new level of service oriented architectures(SOAs), solutions can be interdependent. Applications can depend on interface and information consistency; just as household appliances rely on the consistency of every electric socket so that they just “work.”

The innovator’s dilemma makes it hard for vendors such as Oracle and SAP to accept change and relinquish control. By their dramatic acquisitions and reinvigorated focus on ecosystem development, both acknowledge that a vendor cannot create a single unified suite. But a better focus for them would be on making decisions and taking positions that allow customers flexibility in tying together business scenarios. This flexibility will only come from the stability of interfaces and rapid innovation that is the web and pure SaaS solutions. By not making a choice, the lack of decisiveness of legacy on-premise vendors will result in higher financial costs and less innovation for their own development and their customers’.

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